cash flow prep

8/8/2019 Cash Flow Prep

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STATEMENT OF CASH FLOWS

4th REQUIREDGAAP Statement. Covers a period of time (like an income

statement). Focuses on: Inflows of CASH Outflows of

CASH

text p. 586

201Lec12.PPT


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Questions the Statement ofCash Flow Answers


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Format of the Statement of CashFlowsFour parts (called activities):

Operating -Cash from sales less cash spent onexpenses- 2 options: direct or indirect

Investing - Cash in and out from buying and selling

of balance sheet items

Financing - Cash in from borrowing or stock issueless cash out from paying back debt, buyingtreasury stock or paying dividends

Non-cash investing and financing activities (mustbe significant in $$$)


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FORMAT - 3 main parts plus schedule

Net Income Per income stmt (Accrual basis) xxx+ or - Adjustments (Convert to cash basis) xxxNet Cash from Operations xxxCalled INDIRECT METHOD

text p. 5891 - Cash from OPERATING activities:

Cash receipts from customers xxxless Cash payments: suppliers xxxoperating expenses xxxtaxes xxx - xxxNet Cash from Operations xxxCalled DIRECT METHOD

A l t e r n a t i v e l y text p. 612

SAM

EAMOUNT


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2 - Cash from INVESTING activities:Buy or sell PP&E. xxxBuy or sell OTHER companys stock. xxxLend Money, Receive repayments. xxx xxx3 - Cash from FINANCING activities:Borrow money, pay back debt. xxxBuy or sell your OWN stock. xxxPay dividends. xxx xxx

NET INCREASE (DECREASE) IN CASH XXXCash at Beginning of Year (On balance sheet) XXXCash at End of Year (On balance sheet) XXX


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4 - Supporting ScheduleSIGNIFICANT NON-CASH Transactions should bedisclosed in a separate schedule.

For example: Trade stock for a building orSign note payable for building.


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EXAMPLES: Operating activitiesadjustments.1 - Accrual to Cash conversion:Assume: Sales for year = $100,000.

Beginning A/R = $10,000. Ending A/R = 0.Cash Collected?Cash Collected if Ending A/R = $15,000 instead of $0?Operating Activities:Net income XXXX- Increase in A/R ( 5,000)

Cash from Operations XXXX

If DIRECTmethod: Operating Activities: Receipts fromcustomers: 95,000


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Operating activities Indirect MethodRULES: Increasesin allcurrent assets(except cash)

requirenegativeadjustments to arrive at cashflow.

Decreasesin allcurrent assets(except cash)

requirepositiveadjustments to arrive at cashflow.

Increasesin allcurrent liabilitiesrequirepositiveadjustments to arrive at cash flow.

Decreasesin allcurrent liabilitiesrequirenegativeadjustments to arrive at cash flow.


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EXAMPLES: Operating activitiesadjustments.2 - Noncash revenues or expenses:Assume the following: Cash Revenues 100,000Cash Expenses 90,000Depreciation Exp 50,000NI (40,000)What is Cash Flow?Statement of cash flows:

Net income (40,000)+ Depreciation 50,000Cash from Operations 10,000If DIRECTmethod: Omit any mention of non-cash

expenses! Cash Revenues 100,000

Cash Expenses 90,000Net cash flow 10,000


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Additional Indirect Method RULES: To arrive at operating activities cash flows: Addback

non-cash expenses such as:

DepreciationAmortizationLoss on sale of assets (Also subtract gains.)


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EXAMPLES: Investing & Financing activities

3 - Examine all Non-current assets and liabilities beginningand ending balances. Assume selected balances are:Beginning Ending

Long term assets: Land 100,000 115,000Long term liabilities: N/P 200,000 175,000Equity: Common Stock 500,000 600,000 How did they change? Cash paid or received ? If no cash involved, significant exchange? Investing or financing?

Note no difference if DIRECTmethod. Affects onlyoperating activities format.


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Investing and financing RULES: Locate investing and financing activity items by

reviewing changes in long-term assets, liabilities andequity over the year.- If change used or generated cash, then put onstatement of cash flows.

- If cash not involved, do nothing unless its asignificant exchange. Then put on supporting schedule.

B A L A N C E S H E E T


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EXAMPLE:B A L A N C E S H E E TEND BEGINCash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)Total Assets 66,500 36,500A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

Total Liabs & Equity 66,500 36,500


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EXAMPLE:I N C O M E S T A T E M E N TSales 100,000- CGS -60,000Gross Profit 40,000- Depreciation Expense -6,500- Other Expenses -20,000Net Income from operations 13,500- Loss on sale of PP&E -1,000Net Income 12,500

Other data: Land was bought by signing a note Old building which cost $25,000, accumulated of

$15,000, was sold for $9,000 cash New building was bought for $35,000 cash Stock was issued for $10,000 cash Cash dividends paid were $3,000

EXAMPLE


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EXAMPLE:Sales 100,000- CGS -60,000Gross Profit 40,000- Depreciation Expense -6,500

- Other Expenses -20,000Net Income from operations 13,500- Loss on sale of PP&E -1,000Net Income 12,500

CASH FROM OPERATING ACTIVITIES:NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000

EXAMPLE


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EXAMPLE:END BEGINCash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000

Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)Total Assets 66,500 36,500A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500Total Liabs & Equity 66,500 36,500

CASH FROM OPERATING ACTIVITIES:NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000

+ Decrease in A/R 1,000- Increase in Inventory ( 1,500)- Increase in Prepaid Insurance ( 1,500)

EXAMPLE


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EXAMPLE:END BEGINCash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000

Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)Total Assets 66,500 36,500A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500Total Liabs & Equity 66,500 36,500

CASH FROM OPERATING ACTIVITIES:NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000+ Decrease in A/R 1,000

- Increase in Inventory ( 1,500)- Increase in Prepaid Insurance ( 1,500)

+ Increase in A/P 4,000- Decrease in Unearned Revenue ( 3,500)Net Cash From Operations 18,500

EXAMPLE INVESTING & FINANCING ti iti


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EXAMPLE: INVESTING & FINANCING activities.Analyze all noncurrent accounts END BEGINLand 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

LAND: Increased $10,000.If bought with Cash, then Investing ActivityOther data - land was bought by signing a note.Other than cash > Significant non-cash for schedule.

AllNon -

currentaccount

s

EXAMPLE INVESTING & FINANCING ti iti


19/27

Buy newbuilding

for$35,000

cashSell old buildingfor $9,000 cash


Building: Increased $10,000. Accum Depr: Decreased $8,500.

DepreciationExpense

28000

19500

Building Accum Depr

50000

60000

150002500035000 6500

EXAMPLE: INVESTING & FINANCING activities


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N/P: Increased $10,000.Relates to land purchase discussed earlier.



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Common Stock: Increased $500.Paid In Capital: Increased $9,500.Other data Stock was issued for $10,000 cash so 500shares must have been issued for $20 per share.Financing Activities: $10,000 inflow.




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3,000 of cashdividends were paid.

Retained Earnings: Increased $9,500.


Retained Earnings

11500

21000

12500 = Net Income3000

CASH FROM OPERATING ACTIVITIES:


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NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000+ Decrease in A/R 1,000- Increase in Inventory ( 1,500)- Increase in Prepaid Insurance ( 1,500)+ Increase in A/P 4,000- Decrease in Unearned Revenue ( 3,500)Net Cash From Operations 18,500CASH FROM INVESTNG ACTIVITIES:Proceeds from building sale 9,000Purchase of building (35,000)Net Cash From Investing (26,000)CASH FROM FINANCING ACTIVITIES:Proceeds from stock issuance 10,000Payment of Dividends ( 3,000)Net Cash From Financing 7,000NET DECREASE IN CASH ( 500)Cash at beginning of year 1,500Cash at end of year 1,000

SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES:


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SCHEDULE OF SIGNIFICANT NON CASH EXCHANGES:

Land was obtained by signing a $10,000 notepayable.

Free C sh Flo


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Cash Provided By Operations

Capital Expenditures Dividends PaidFree Cash Flow

Free Cash Flow

Considered excess cashavailable after spending tomaintain operationalefficiency and shareholderssatisfied.

Text p 604

Current Cash DebtText p 607


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Current Cash DebtCoverage Ratio =

Cash provided by operationsAverage current liabilities

Probably better than current ratio inassessing ability to meet current liabilitypayments.

Text p 607


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Prepared by

P.Ravikishore b.com,ACAContact me [email protected]

cash flow prep

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